Coronavirus Climate Shows Benefits of This Retail ETF | ETF Trends

The coronavirus is hastening an already fast-moving trend, that being shoppers’ preference for online retail over brick-and-mortar stores. With malls and non-essential stores currently shuttered, e-commerce is booming and that puts the spotlight on the ProShares Long Online/Short Stores ETF (NYSEArca: CLIX).

CLIX tracks the ProShares Long Online/Short Stores Index, which combines two specialized retail indexes into one. It is 100% long the ProShares Online Retail Index, which includes retailers that primarily sell online or through other non-store channels, and 50% short the Solactive-ProShares Bricks and Mortar Retail Store Index that brings together traditional in-store retailers. So, the strategy benefits from the decreased foot traffic to traditional brick-and-mortar shops and from the increased reliance on online sales as more people shop at home.

Data confirm that COVID-19 is adversely impacting some old school retailers.

“We project retail discretionary spending will decline 40%-50% in first-half 2020, with a slow rate of improvement expected through the summer from a current 80%-90% decline in sales if stores start to open mid-May or early June,” said Fitch Ratings in a recent note.

Call on CLIX

E-commerce sales are growing at a rapid pace and undermining in-store retail as consumer habits change and shoppers move online. As popular as they may seem now, online retailers like Amazon and Alibaba only account for about 10% of global retail sales, leaving tremendous room for growth.

Adding to the case for the CLIX long/short strategy is that many brick-and-mortar are under cash flow duress and credit rating pressure.

“In addition to the recent downgrades, the Rating Outlooks for most of these discretionary retailers have been placed on Negative on the expectation of significantly lower EBITDA and cash flow in 2020 and the unclear shape of the recovery,” said Fitch. “Numerous unknowns remain including the length of the outbreak, the timeframe for a full reopening of retail locations and the cadence at which it is achieved, and unemployment and household income trends exiting the pandemic.”

While some retailers are responding to the challenges presented by COVID-19 with cost-saving measures, those moves could prove inadequate in a prolonged research.

“Retailers have responded to the pandemic with a variety of operating and cash flow preservation initiatives, including cost reduction in both operating structures and capex, pulling back on inventory buys, proactive credit facility draws, and suspension of share buybacks and dividends,” according to Fitch. “Despite these actions, leverage profiles for retailers in discretionary categories are expected to materially weaken in 2020, well outside rating sensitivity levels, before improving somewhat in 2021.”

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.